<PAGE>   1

                                  WHITEHALL(R)
                            WHITEHALL JEWELERS, INC.
                        
                                   [GRAPHIC}


                               1998 Annual Report




<PAGE>   2

                             ---------------------
                                Company Profile
                             ---------------------

Whitehall Jewellers, Inc. (formerly Marks Bros. Jewelers, Inc.) is a leading
national specialty retailer of fine jewelry operating 250 stores in 28 states as
of January 31, 1999. Founded in 1895, the Company operates stores in regional
and superregional shopping malls under the names Whitehall Co. Jewellers,
Lundstrom Jewelers, and Marks Bros. Jewelers. Whitehall Jewellers, Inc.'s Common
Stock is traded on the NASDAQ National Market System under the symbol "WHJI."


                                 [MAP GRAPHIC]


<TABLE>
<CAPTION>
                                                           FISCAL         Fiscal        Fiscal
(in thousands, except per share data)                        1998           1997          1996
----------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>           <C>       
STATEMENT OF OPERATIONS DATA:
Net sales .............................................  $238,942       $188,898      $155,474
Income from operations ................................  $ 27,313       $ 22,216      $ 19,031
Pro forma net income(1) ...............................  $ 14,262       $ 11,230      $  7,343
Pro forma net income per share(1)......................  $   1.38       $   1.10      $   0.89
Return on equity(2)....................................      25.9%          26.3%          N/A
----------------------------------------------------------------------------------------------
</TABLE>

(1) Pro forma results exclude the extraordinary gain on the extinguishment of 
debt in the second quarter of fiscal 1996 and the extraordinary loss on the
extinguishment of debt in the fourth quarters of fiscal 1997 and 1996. The
effects of the Company's IPO, recapitalization and follow-on equity offering in
fiscal 1996 are reflected as of the date they occurred. 

(2) Return on equity is calculated by dividing pro forma net income by average
shareholders' equity.


<PAGE>   3

-------------------
TO OUR SHAREHOLDERS
-------------------

There's a new name on the cover of this year's annual report. On January 20,
1999, we changed our corporate name from Marks Bros. Jewelers, Inc. to 
Whitehall Jewellers, Inc. to align our corporate name with our principal store
brand -- and the commitment to quality, service and convenience that stands
behind it.

        Fiscal 1998 was an exceptional year for our Company. We strengthened our
position in today's consolidating jewelry industry by opening 34 new stores and
acquiring a chain of 36 stores in the southeastern United States. With 250
stores in 28 states, we have the market presence and the operating scale to
take better advantage of an economic climate that favors discretionary
purchases. These factors, plus our efforts to expand our marketing programs and
credit promotions, produced impressive gains in comparable store sales and
propelled us to our seventh consecutive year of record sales and earnings. This
performance demonstrates that our proven operating strategy of growing our store
base and optimizing sales through upscale merchandising and well-timed
promotions can produce the strong, sustained growth our shareholders expect.

RECORD RESULTS
Whitehall Jewellers continued its track record of delivering strong growth in
sales and earnings. Net sales for the fiscal year ended January 31, 1999
increased 26.5% over the prior fiscal year to $238.9 million. This increase
reflects a 5.8% increase in comparable store sales, plus sales from acquired
stores and new stores opened during the year. Income from operations rose nearly
23% to $27.3 million from $22.2 million in fiscal 1997. Income before
extraordinary items rose to $14.3 million, or $1.38 per diluted share, versus
$11.2 million, or $1.10 per diluted share, for fiscal 1997.
        Over the past five years our operating strategy has produced a
compounded annual growth rate in operating income of about 26%. Recognizing
that our stock price does not fully reflect our sustained earnings performance,
in February 1999 our Board of Directors authorized the purchase of up to $10
million of the Company's shares. 

"WE ACCELERATED OUR GROWTH BY OPENING 34 NEW STORES AND ACQUIRING A CHAIN OF 36
STORES IN THE SOUTHEAST."

                                    [PHOTO]

OUR OPEN-STORE FORMAT PROVIDES AN ATTRACTIVE AND INVITING SHOPPING EXPERIENCE.


                                  ============
                                  STORE GROWTH
                             (Dollars in millions)

                                  [BAR GRAPH]



                                                            1998 Annual Report 1
<PAGE>   4


A PROVEN FORMULA FOR GROWTH
The cornerstone of our growth strategy has been to open immediately productive
new stores and to increase the productivity of existing stores. In 1998 we
developed a third avenue for growth when we successfully completed a significant
acquisition that gives us a strong presence in a dynamic, fast growing market.

Opening New Stores. In fiscal 1998 we opened 34 new stores -- compared to 30
stores in fiscal 1997 -- and entered several new markets including Los Angeles,
Philadelphia and Portland, Oregon. We followed our proven operating strategy of
opening small, center court stores in well-established, upscale malls. Our small
store format gives us a distinct advantage by limiting the competition we face
for prime store locations. And because we spread most of our new store openings
throughout our current markets, we can effectively leverage our supervisory
personnel and certain media advertising.
        By combining outstanding real estate with extensive jewelry assortments,
we ensure that our new stores quickly achieve impressive sales results and
generate strong returns on investment. Whitehall's average store generates
about $1.1 million in sales, up from $990,000 in fiscal 1996. In fact, within
twelve months of opening, our new stores typically achieve about 90% of the
sales volume of a mature store. Our average sales per square foot of $1,323 is
among the highest in the industry, making Whitehall Jewellers a desirable
tenant.

Improving Store Productivity. The second key element of Whitehall's 
operating strategy is to continually increase the sales productivity of our
stores. The Company has increased comparable store sales for 21 consecutive
quarters. We also increased the size of our average merchandise sale from $273
in fiscal 1997 to $286 in fiscal 1998.
        Our growth in sales is in some measure due to our successful private
label credit program which offers our customers the convenience of instant
credit. Our non-recourse arrangement with a third-party source avoids credit
risk to the Company and helps us maintain the quality of our earnings. It also
allows our sales associates to focus on selling jewelry rather than on numerous
credit functions.

"OUR 26% RETURN ON EQUITY PLACES US AT THE TOP OF OUR INDUSTRY."


                                    [PHOTO]

OPERATING TWO STORE CONCEPTS WITHIN A MALL ALLOWS US A SAFER, EASIER FORM OF
EXPANSION.

                                  ============
                                  SALES GROWTH
                             (Dollars in millions)

                                  [BAR GRAPH]


2 Whitehall Jewellers, Inc.

<PAGE>   5

        The decision to expand our marketing initiatives also directly
impacts our sales growth. Marketing will play an increasingly important role in
the years to come as we continue to expand our store base and build our brand
identity. Our marketing database now contains valuable demographic and
purchase-related information on over one million customers. With our greater
operating scale, we are now well-positioned to leverage our marketing campaigns
to cover more stores and reach more customers. In 1997, we initiated our first
Christmas radio campaign that promoted about 30% of our stores. During 1998, our
holiday radio campaign extended to nearly 50% of our stores. Along with our
successful direct marketing campaign, radio advertising helped drive a fourth
quarter comparable store sales increase of 8.3%.

Growing Through Acquisition. In September 1998, the Company made its first
large-scale acquisition when we purchased the 36-store Jewel Box chain. These
stores, located primarily in North Carolina and several surrounding states,
have enabled Whitehall to quickly develop operating scale in a growing market
where we had no significant presence. Like our existing stores, most have
attractive, open storefronts and occupy prime corner locations in established
malls. We have converted all of these stores to Whitehall/Lundstrom merchandise
assortments, credit programs, operating procedures and nameplates. These stores
have posted solid sales increases since the acquisition and should contribute
to Whitehall's ongoing earnings momentum.

THE RIGHT PEOPLE
Every successful organization must know its customers and exceed their
expectations. We serve our customers during special times in their lives --
often when they are giving a meaningful gift to a loved one. And these occasions
require the special attention customers experience at Whitehall. We hire highly
talented and motivated people and give them the tools they need to provide our
customers with a wonderful shopping experience. We attract and retain sales
associates through incentive programs that provide them bonus opportunities
throughout the year. In 1998, we continued to build our infrastructure -- and
provide our sales associates additional guidance and support -- by adding 10
new field-based supervisors. 


"WE'VE INCREASED COMPARABLE STORE SALES FOR 21 CONSECUTIVE QUARTERS."

                                    [PHOTO]

OUR SMALL STORE FORMAT LIMITS COMPETITION FOR PRIME "CENTER COURT" LOCATIONS.

                            =======================
                            OPERATING INCOME GROWTH
                              
                             (Dollars in millions)

                                  [BAR CHART]


                                                            1998 Annual Report 3
<PAGE>   6
OUTLOOK 
As a leader in the fine jewelry industry, Whitehall Jewellers has achieved 
consistent long-term success by responding to changing demographics and customer
preferences. We cater to the more upscale baby boom generation that is
characterized by above-average household incomes and greater spending on
discretionary purchases. To better serve these customers, we have expanded our
selection of upscale merchandise. Sales of big-ticket items over $3,000 now
comprise over 15% of total sales, and many of our most popular items sell for
$1,000 or more.
        In 1998, we continued our track record of posting strong
growth in operating income. We did so by adhering to our proven operating
strategy that combines new store expansion with upscale merchandising and
attractive marketing campaigns that target our prosperous customer base. We also
augmented this growth strategy when we completed a significant acquisition. We
will consider similar opportunities in the future as today's large but
fragmented jewelry industry continues to consolidate.
        In 1999, we will expand our operations further by opening approximately
40 new stores. We have reached agreement with developers to open stores in
almost all of the locations we have targeted, and already have opened a number
of stores since the beginning of fiscal 1999. While most of our growth will be
concentrated in existing markets, we plan to enter the Indianapolis, Seattle
and Austin, Texas markets this year.
        We are enthusiastic about our future growth opportunities. The
investments we have made in new stores, marketing, infrastructure and
talented people have produced impressive results. As we look ahead, we believe
we have the operating and growth strategies to continue to capture additional
market share and build shareholder value.


/s/ HUGH M. PATINKIN

HUGH M. PATINKIN
Chairman of the Board, Chief Executive Officer and President

"OUR STOCK REPURCHASE PROGRAM REFLECTS OUR CONFIDENCE IN THE COMPANY'S PROSPECTS
FOR LONG-TERM GROWTH AND PROFITABILITY."

[PHOTO]

Executive Management (left to right):

MANNY A. BROWN
Executive Vice President -
Store Operations

JOHN R. DESJARDINS
Executive Vice President - 
Finance and Administration, 
Secretary

MATTHEW M. PATINKIN
Executive Vice President -
Store Operations

HUGH M. PATINKIN
Chairman of the Board, 
Chief Executive Officer, President

LYNN EISENHEIM
Executive Vice President -
Merchandising

4  Whitehall Jewellers, Inc.
<PAGE>   7
--------------------------------------------------------------------------------
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following table sets forth certain financial and operating data of the
Company. The selected statement of operations data and balance sheet data as of
and for the fiscal year ended January 31, 1999 (fiscal 1998) and each of the
four prior fiscal years are derived from audited financial statements of the
Company. The selected financial information set forth below should be read in
conjunction with"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's audited financial statements appearing
elsewhere herein.
<TABLE>
<CAPTION>

(in thousands, except per share and 
   selected operating data)                         FISCAL 1998    Fiscal 1997       Fiscal 1996      Fiscal 1995       Fiscal 1994
------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
<S>                                                  <C>            <C>                 <C>              <C>               <C>   
Net sales                                            $  238,942     $  188,898          $155,474         $131,022          $106,683
Cost of sales (including buying and
 occupancy expenses)                                    139,368        110,873            91,134           77,722            64,223
------------------------------------------------------------------------------------------------------------------------------------
     Gross profit                                        99,574         78,025            64,340           53,300            42,460
Selling, general and administrative expenses             72,261         55,809            45,309           37,887            30,748
------------------------------------------------------------------------------------------------------------------------------------
     Income from operations                              27,313         22,216            19,031           15,413            11,712
Interest expense                                          4,123          3,806             6,993           12,314            10,594
Stock award expense                                        --             --                --                461              --
ESOP compensation expense                                  --             --                --                590               547
------------------------------------------------------------------------------------------------------------------------------------
  Income from continuing operations
   before income taxes                                   23,190         18,410            12,038            2,048)              571
Income tax expense (benefit)(1)                           8,928          7,180             4,695          (14,924)             --
------------------------------------------------------------------------------------------------------------------------------------
     Net income before extraordinary items               14,262         11,230             7,343           16,972               571
Extraordinary item, net(2)                                 --           (1,035)           10,057             --                --
------------------------------------------------------------------------------------------------------------------------------------
     Net income                                      $   14,262     $   10,195          $ 17,400         $ 16,972          $    571
====================================================================================================================================
DILUTED EARNINGS PER SHARE:
     Net income before extraordinary items           $     1.38     $     1.10          $   0.89         $   3.49          $   0.11

SELECTED OPERATING DATA:
     Stores open at end of period                           250            191               164              146               131
     Average net sales per store(3)                  $1,100,000     $1,045,000          $990,000         $936,000          $836,000
     Average net sales per gross square foot(4)      $    1,323     $    1,325          $  1,247         $  1,187          $  1,068
     Average merchandise sale                        $      286     $      273          $    255         $    245          $    229
     Comparable store sales increase(5)                     5.8%           4.8%              7.9%            11.0%              7.6%

BALANCE SHEET DATA (AT END OF PERIOD):
     Working capital                                 $   38,478     $   34,967          $ 25,824         $ 21,512          $ 20,460
     Total assets                                       169,606        118,003            93,533           87,403            61,512
     Total debt                                          49,526         28,907            21,267          107,891           110,806
     Stockholders' equity (deficit)                      62,168         47,803            37,507          (47,858)          (66,578)
</TABLE>

(1) Income tax benefit in the year ended January 31, 1996 (fiscal 1995) resulted
from the reversal of the Company's deferred tax valuation allowance and
corresponding recognition of a deferred tax asset.

(2) Reflects net extraordinary gain (loss) in connection with the extinguishment
of debt (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Background" and Note 9 of Notes to Financial
Statements).

(3) Average net sales per store represents the total net sales for stores open
for a full fiscal year divided by the total number of such stores.

(4) Average net sales per gross square foot represents total net sales for
stores open for a full fiscal year divided by the total square feet of such
stores.

(5) A store becomes comparable after it has been open for 12 full months. Fiscal
year 1998 includes sales from the acquired Jewel Box stores from October 1998
through January 1999.

                                                            1998 Annual Report 5


<PAGE>   8
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's financial
statements, including the notes thereto.

BACKGROUND
The Company is a leading, national specialty retailer of fine jewelry operating
250 stores in 28 states as of January 31, 1999. The Company's sales and income
from operations have increased consistently since fiscal 1992 to $238.9 million
and $27.3 million, respectively, in fiscal 1998. During that same period, the
number of Company stores grew to 250 from 111, and the Company's average annual
store sales increased to $1,100,000 from $784,000.

          To strengthen its capital structure and provide greater financial
flexibility for new store openings, in May 1996, the Company completed an
initial public offering and a concurrent restructuring of outstanding
indebtedness which substantially reduced the Company's indebtedness and ongoing
interest expense. In November 1996, the Company completed a second public
offering that further strengthened the Company's capital structure, reduced
indebtedness and enabled the Company to accelerate the pace of new store
openings. A portion of the proceeds from the common stock offerings in fiscal
1996 were used to extinguish outstanding indebtedness prior to the stated
maturity dates, and resulted in extraordinary gains and charges. In the fourth
quarter of fiscal 1997, the Company completed a tender offer to purchase a
portion of its subordinated debt, resulting in an extraordinary charge to
earnings.

          The growth of the Company's net sales and earnings will depend to a
significant degree on the Company's ability to successfully expand its
operations through the opening of new stores. The Company plans to open
approximately 40 stores in calendar 1999, and a similar number of stores in
2000. The Company's policy is to charge as incurred pre-opening costs associated
with new stores.

          In September 1998, the Company acquired substantially all of the Jewel
Box chain consisting of 36 jewelry stores located in eight states in the
southeastern United States. The Company financed the acquisition through an
amended and expanded term loan and revolving credit facility. All of the
acquired stores have been converted to Whitehall/Lundstrom merchandise
assortments, credit programs, operating procedures and brand names.

          A variety of factors affect the sales results for the Company's
stores, including economic conditions, the retail sales environment, the
availability and cost of credit from third party credit providers, the results
of the Company's merchandising and marketing strategies, and the Company's
ability to otherwise execute its business strategy. The Company experienced a
5.8% comparable store sales increase in fiscal 1998 (which includes sales from
October 1998 through January 1999 from the Jewel Box stores acquired in
September 1998). There can be no assurance that the Company will achieve
comparable store sales increases in future reporting periods.

          The Company's business is highly seasonal, with a significant portion
of its sales and most of its income generated during the fourth fiscal quarter
ending January 31. The Company has historically experienced lower net sales in
each of its first three fiscal quarters and expects this


6  Whitehall Jewellers, Inc.
<PAGE>   9
--------------------------------------------------------------------------------
trend to continue. The Company has experienced net losses from time to time in
one or more of its first three fiscal quarters. The Company's quarterly and
annual results of operations may fluctuate significantly as a result of factors
including the timing of new store openings; net sales contributed by new stores;
increases or decreases in comparable store sales; timing of certain holidays;
changes in the Company's merchandise, marketing, or credit programs; general
economic, industry and weather conditions that affect consumer spending; and
pricing, merchandising, marketing, credit and other programs of competitors.

RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain information
derived from the statements of operations of the Company expressed as a
percentage of net sales for such periods.
<TABLE>
<CAPTION>

Percentage of Net Sales                                      FISCAL 1998   Fiscal 1997 Fiscal 1996
--------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>          <C>   
Net sales                                                       100.0%        100.0%       100.0%
Cost of sales (including buying and occupancy expenses)          58.3          58.7         58.6 
--------------------------------------------------------------------------------------------------
     Gross profit                                                41.7          41.3         41.4 
Selling, general and administrative expenses                     30.3          29.5         29.2 
--------------------------------------------------------------------------------------------------
Income from operations                                           11.4          11.8         12.2 
Interest expense                                                  1.7           2.0          4.5 
--------------------------------------------------------------------------------------------------
     Income before income taxes                                   9.7           9.8          7.7 
Income tax expense                                                3.7           3.8          3.0 
--------------------------------------------------------------------------------------------------
     Net income before extraordinary items                        6.0           6.0          4.7 
Extraordinary item, net                                            --          (0.6)         6.5 
--------------------------------------------------------------------------------------------------
     Net income                                                   6.0%          5.4%        11.2%
==================================================================================================
</TABLE>

FISCAL 1998 COMPARED TO FISCAL 1997

Net sales increased $50.0 million, or 26.5%, to $238.9 million in fiscal 1998
from $188.9 million in fiscal 1997. Comparable store sales increased $11.0
million, or 5.8% in fiscal 1998. Sales for the Jewel Box stores (purchased in
September 1998) from October 1998 through January 1999 contributed approximately
0.3% of the comparable store sales increase for fiscal 1998. Sales from new
stores contributed $27.8 million to the overall increase in net sales. Sales
from the acquired stores contributed $12.5 million in increased sales. Increases
in layaway balances contributed to a higher sales increase of $0.7 million
compared to the prior fiscal year. These increases were offset partially by
lower sales of $1.9 million related to store closings, together with stores
closed for remodeling for limited periods. The total number of merchandise units
sold increased by approximately 21.2% from fiscal 1997 to fiscal 1998, while the
average price per merchandise sale increased by 4.8% to $286 in fiscal 1998 from
$273 in fiscal 1997. Comparable store sales increased due to the strong economic
environment for jewelry purchases, increased use of non-recourse credit,
enhanced marketing programs, strong store inventory assortments, the
contribution from the acquired jewelry stores and on-going improvements in the
quality of the Company's store-based personnel. The Company opened 70 new stores
(including the 36 acquired stores) and closed 11 stores during fiscal 1998,
increasing the number of stores operated to 250 as of January 31, 1999 from 191
as of January 31, 1998. 

                                                            1998 Annual Report 7
<PAGE>   10

--------------------------------------------------------------------------------
Gross profit increased $21.5 million, or 27.6%, to $99.6 million in fiscal 1998,
from $78.0 million in fiscal 1997. As a percentage of net sales, gross margin
increased to 41.7% in fiscal 1998 from 41.3% in fiscal 1997. This increase was
due to a shift in product mix to somewhat higher margin jewelry items and higher
margins on gold, precious and semi-precious jewelry categories. Occupancy,
distribution and buying costs decreased as a percentage of net sales due to
economies of scale achieved through the Company's larger store base and
increased net sales. 

          Selling, general and administrative expenses increased $16.5 million,
or 29.5%, to $72.3 million in fiscal 1998 from $55.8 million in fiscal 1997. As
a percentage of net sales, selling, general and administrative expenses
increased to 30.2% in fiscal 1998 from 29.5% in fiscal 1997. The dollar increase
related primarily to higher advertising expenses ($1.3 million), higher payroll
expenses ($10.6 million), increased other operating expenses ($2.9 million), and
higher credit expenses ($1.5 million). Selling, general and administrative 
expenses attributable to the 34 stores opened and 36 stores acquired in fiscal
1998 and 30 stores opened in fiscal 1997 accounted for $10.4 million of the
total increase in selling, general and administrative expenses. Expenses
associated with the acquisition and integration of jewelry stores accounted for
approximately $1.0 million of the increase. Advertising expenses increased in
fiscal 1998 as compared to fiscal 1997 due to an expansion of the Company's
marketing programs, including radio advertising during the Christmas holiday
season and direct marketing campaigns. Payroll costs increased in fiscal 1998,
as compared to fiscal 1997, due primarily to a continuing effort to upgrade the
quality of store managers, an increase in incentive compensation paid to
store-based personnel, plus the addition of more field-based supervisors. Credit
sales as a percentage of net sales increased to 38.6% in fiscal 1998 from 38.0%
in fiscal 1997 due to greater emphasis on private label credit promotions. The
usage of private label credit contributed to an increase in the average price
per merchandise sale and higher total sales.

          As a result of the factors discussed above, income from operations
increased 22.9% to $27.3 million in fiscal 1998 from $22.2 million in fiscal
1997. As a percentage of net sales, income from operations decreased to 11.4% in
fiscal 1998 from 11.8% in fiscal 1997.

          Interest expense increased $0.3 million, or 8.3%, to $4.1 million in
fiscal 1998 from $3.8 million in fiscal 1997. As a percentage of net sales,
interest expense decreased to 1.7% in fiscal 1998 from 2.0% in fiscal 1997. The
dollar increase in interest expense was due primarily to higher average
indebtedness.

FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased $33.4 million, or 21.5%, to $188.9 million in fiscal 1997
from $155.5 million in fiscal 1996. Comparable store sales increased $7.3
million, or 4.8%, in fiscal 1997. Sales from new stores contributed $26.9
million to the overall increase in net sales. Increases in layaway balances
contributed to a higher sales increase of $0.4 million compared to the prior
fiscal year. These increases were offset partially by lower sales of $1.1
million related to store closings, together with stores closed for remodeling
for limited periods. The average number of units sold per store decreased by
approximately 1.5% from fiscal 1996 to fiscal 1997, while the average price per
merchandise sale increased by 7.1% to $273 in fiscal 1997 from $255 in fiscal
1996. Comparable store sales increased in large part due to increased
advertising and promotional initiatives, including certain private label
non-recourse credit programs, expanded assortments of upscale merchandise, 




8 Whitehall Jewellers, Inc.
<PAGE>   11

--------------------------------------------------------------------------------
and improvements in the quality of the Company's personnel, as well as a solid
retail environment for most of the year. These increases were offset by higher
returns as a result of the implementation of a more liberal customer return
policy during fiscal 1997. The Company opened 30 new stores and closed three
stores during fiscal 1997, increasing the number of stores operated to 191 as of
January 31, 1998 from 164 as of January 31, 1997.

          Gross profit increased $13.7 million, or 21.3%, to $78.0 million in
fiscal 1997 from $64.3 million in fiscal 1996. As a percentage of net sales,
gross margin decreased slightly to 41.3% in fiscal 1997 from 41.4% in fiscal
1996. This decrease was due primarily to a shift in product mix to somewhat
lower margin jewelry items. Occupancy, distribution and buying costs decreased
as a percentage of net sales due to economies of scale achieved through the
Company's larger store base and increased net sales.

          Selling, general and administrative expenses increased $10.5 million,
or 23.2%, to $55.8 million in fiscal 1997 from $45.3 million in fiscal 1996. As
a percentage of net sales, selling, general and administrative expenses
increased to 29.5% in fiscal 1997 from 29.1% in fiscal 1996. The dollar increase
related primarily to higher advertising expenses ($2.3 million), higher payroll
expenses ($6.2 million) and higher credit expenses ($0.7 million). Selling,
general and administrative expenses attributable to the 30 stores opened in
fiscal 1997 and 20 stores opened in fiscal 1996 accounted for $7.9 million of
the total increase in selling, general and administrative expenses. Advertising
expenses increased in fiscal 1997 as compared to fiscal 1996 due to an expansion
of the Company's marketing programs, including the addition of radio advertising
during the Christmas holiday season. Payroll costs increased in fiscal 1997, as
compared to fiscal 1996, due primarily to additions to the management team and
an increase in the number of field-based supervisors, as well as a continuing
effort to upgrade the quality of store managers and an increase in incentive
compensation paid to store-based personnel. Private label non-recourse credit
sales as a percentage of net sales decreased to 38.0% in fiscal 1997 from 40.1%
in fiscal 1996 primarily as a result of the discontinuation of the first time
buyers program in December 1996, which represented 4.2% of sales in fiscal 1996.
While private label non-recourse credit sales as a percentage of total sales
decreased, private label non-recourse credit sales excluding first-time buyers
increased to 38.0% in fiscal 1997 from 36.0% in the previous year. In fiscal
1997, the Company used a one-year no-interest credit program which resulted in
increased private label credit sales. These private label non-recourse credit
sales carry higher discount rates than bankcard sales. The usage of private
label non-recourse credit contributed to an increase in the average price per
merchandise sale and higher sales.

          As a result of the factors discussed above, income from operations
increased 16.7% to $22.2 million in fiscal 1997 from $19.0 million in fiscal
1996. As a percentage of net sales, income from operations decreased to 11.8% in
fiscal 1997 from 12.2% in fiscal 1996.

          Interest expense decreased $3.2 million, or 45.6%, to $3.8 million in
fiscal 1997 from $7.0 million in fiscal 1996. As a percentage of net sales,
interest expense decreased to 2.0% in fiscal 1997 from 4.5% in fiscal 1996. The
dollar decrease in interest expense was due primarily to lower average
indebtedness and lower interest rates.

LIQUIDITY AND CAPITAL RESOURCES
Over the last three fiscal years, the Company's ongoing capital requirements
have been to fund




                                                            1998 Annual Report 9
<PAGE>   12

--------------------------------------------------------------------------------
increases in inventory at existing stores, to fund capital expenditures and
working capital (primarily inventory) associated with the Company's new stores,
and in fiscal 1998, to acquire stores from a third party. During the same
period, the Company's primary sources of liquidity have been cash flow from
operations and bank borrowings under the Company's credit facility.

          The Company's cash flow from operating activities increased to $11.0
million in fiscal 1998 from $0.4 million in fiscal 1997. Higher income from
operations together with increases in accounts payable ($9.1 million), accrued
expenses ($9.2 million), depreciation and amortization ($5.2 million), and the
proceeds from accounts receivable sold ($4.0 million) were offset partially by
increases in merchandise inventories ($28.5 million), layaway receivables ($0.9
million), and accounts receivable ($0.8 million). Cash used in investing
activities included the purchase of 36 jewelry stores ($21.8 million) and the
funding of capital expenditures ($14.7 million) related primarily to the opening
of 34 new stores in fiscal 1998. Cash generated from financing activities
included (i) proceeds from the term loan under the new credit facility ($20.0
million), (ii) an increase in revolver borrowings under the new credit facility
($12.0 million), (iii) proceeds from gold consigned under the gold consignment
facility ($6.0 million), and (iv) proceeds from the exercise of stock options
($0.1 million). The Company increased its use of cash for financing activities
in fiscal 1998 due in part to a decrease in the net amount of outstanding checks
($1.8 million). The Company utilized cash for financing activities in fiscal
1998 primarily to repay the previous term loan ($11.4 million). Stockholders'
equity increased from $47.8 million at January 31, 1998 to $62.2 million at
January 31, 1999.

          The Company's cash flow from operating activities increased to a
positive cash flow of $0.4 million in fiscal 1997 from a cash flow shortfall of
$3.6 million in fiscal 1996. Higher income from operations together with
increases in accounts payable ($1.8 million), accrued expenses ($2.7 million),
and deferred income tax ($4.2 million) were offset partially by increases in
merchandise inventories ($20.6 million) and accounts receivable ($1.2 million).
Cash used in investing activities include the funding of capital expenditures
($10.5 million), related primarily to the opening of 30 new stores in fiscal
1997. Cash generated from financing activities included (i) proceeds from the
term loan ($11.4 million), (ii) an increase in revolver borrowings under the
current revolving credit facility ($6.1 million), (iii) proceeds from the
exercise of stock options ($0.1 million), and (iv) an increase in the net amount
of outstanding checks ($2.4 million). The Company utilized cash in fiscal 1997
primarily to repay or repurchase subordinated debt ($9.9 million) and to pay
associated costs ($1.0 million, net of tax). Stockholders' equity increased from
$37.5 million at January 31, 1997 to $47.8 million at January 31, 1998.

          In September 1998, the Company amended and expanded its credit
facility to a total of $110 million. The Company has a $90.0 million revolving
credit facility and a $20.0 million term loan facility through September 10,
2003. A gold consignment facility of up to $40.0 million is available under the
revolving credit facility. Interest rates and commitment fees charged on the
unused facility float in a grid based on the Company's quarterly performance.
Since these interest rates are determined by reference to Eurodollar or prime
rates, changes in market interest rates can materially affect the Company's
interest expense. Borrowings under the revolver are limited to a borrowing base
determined based on levels of inventory and accounts receivable. The peak
outstanding borrowings under the Company's revolver during fiscal 1998 and 1997
were $45.5 million and $32.5 million, respectively. The unused facility was
$44.1 million as of January 31, 1999.

The Company has a gold consignment facility with a lending institution pursuant
to which the Company accepts as consignee, and is responsible to return at some
future date, a fixed number of





10 Whitehall Jewellers, Inc.
<PAGE>   13
--------------------------------------------------------------------------------
ounces of gold. The periodic charges paid by the Company are computed based on a
percentage of the value of the gold consigned. Therefore, an increase in the
price of gold could increase substantially the annual costs to the Company of
the gold consignment and the eventual cost to the Company upon the termination
of this arrangement. During fiscal 1996 and 1998, the Company sold and
simultaneously consigned 39,000 and 20,000 troy ounces of gold for $15.3 and
$6.0 million, respectively. During fiscal 1997, the Company did not sell and
consign any gold. 

          On March 3, 1999, the Company sold and simultaneously consigned 10,500
troy ounces of gold for $3.0 million under its gold consignment facility. With
the addition of the newly consigned gold, on September 10, 2003, the Company is
required to repurchase 69,500 troy ounces of gold under the facility at the
prevailing gold rate in effect on that date, or the facility will be renewed. 

          A substantial portion of the merchandise sold by the Company is
carried on a consignment basis prior to sale or is otherwise financed by
vendors, thereby reducing the Company's direct capital investment in inventory.
The peak consigned inventories from merchandise vendors were $43.2 million and
$32.5 million during fiscal 1998 and 1997, respectively. The willingness of
vendors to enter into such arrangements may vary substantially from time to time
based on a number of factors including the merchandise involved, the financial
resources of vendors, interest rates, availability of financing, fluctuations in
gem and gold prices, inflation, the financial condition of the Company and a
number of economic or competitive conditions in the jewelry business or the
economy generally. Any change in these relationships could have a material
adverse effect on the Company's results of operations or financial condition. 

          On February 19, 1999, the Company announced that its Board of
Directors had authorized the repurchase of up to $10.0 million of its Common
Stock. The repurchase program authorizes the Company to purchase shares over an
18 month period in the open market or through privately negotiated transactions.
The program will be financed using the Company's revolving credit facility. As
of March 31, 1999, the Company had repurchased 565,500 shares at a total cost of
approximately $9.3 million. 

          During 1999, the Company plans to open approximately 40 stores. New
stores on average require inventory of approximately $450,000 and capital
expenditures of approximately $250,000. Pre-opening expenses for each new store
average approximately $20,000. The Company anticipates capital expenditures of
approximately $16 million for new store openings and other fixed assets to be
placed in service during fiscal 1999. Also, the Company intends to modify and
upgrade its existing computer systems to be year 2000 compliant.

          The Company's inventory levels and working capital requirements
historically have been highest in advance of the Christmas season. The Company
has funded these seasonal working capital needs through borrowings under the
Company's revolver and increases in trade payables and accrued expenses.

          Management expects that cash flow from operating activities and funds
available under its revolving credit facility should be sufficient to support
the Company's current new store expansion program and seasonal working capital
needs for the foreseeable future.

INTEREST RATE RISK
The Company's exposure to changes in interest rates relates primarily to its
borrowing activities to fund business operations. The Company principally uses
floating rate borrowings under its revolving credit and term loan facilities.
The Company does not use derivative financial instruments.

                                                           1998 Annual Report 11
<PAGE>   14
--------------------------------------------------------------------------------
     The information below summarizes the Company's interest rate risk
associated with debt obligations outstanding as of January 31, 1999. The table
presents principal cash flows and related interest rates by fiscal year of
maturity or repricing date.
<TABLE>
<CAPTION>


                                           Expected Fiscal Year of Maturity/Repricing

(in thousands)                1999         2000       2001        2002      Thereafter    Total
-------------------------------------------------------------------------------------------------
<S>                        <C>                                                           <C>    
Variable rate (a)          $48,886                                                       $48,886
Average interest rate         7.19%                                                         7.19%
Fixed rate                                                                   $   640     $   640
Average interest rate                                                          12.15%      12.15%
</TABLE>

(a) Includes $20.0 million of term debt with scheduled principal payments due
between January 1999 and September 2003. All term loans are variable rate which
reprice within 1999. As of January 31, 1999, interest rates for borrowings under
the revolving loan and term loan facility are, at the Company's option,
Eurodollar rates plus 175 and 225 basis points, respectively, or the bank's
prime rate plus zero and 50 basis points, respectively. Interest rates charged
on the facility float in a grid based on the Company's quarterly financial
performance.

GOLD PRICE RISK
The Company's exposure to changes in the price of gold relates to its borrowing
activities under its gold consignment facility. The Company accepts as
consignee, and is responsible to return at some future date, a fixed number of
ounces of gold. The periodic charges paid by the Company are computed based on
a percentage of the value of the gold consigned. An increase in the price of
gold could substantially increase the annual costs to the Company of the gold
consigned and the eventual costs to the Company upon the termination of this
arrangement.

     The information below summarizes the Company's market risks associated with
gold consigned as of January 31, 1999. The table below presents the number of
troy ounces of gold consigned and the average gold prices by fiscal year of
maturity.

<TABLE>
<CAPTION>
                                          Expected Fiscal Year of Maturity

                              1999         2000       2001        2002      Thereafter    Total
-----------------------------------------------------------------------------------------------
<S>                                                                           <C>        <C>    
Troy ounces of gold  
 consigned                                                                    59,000     59,000 
Average gold price                                                              $290       $290
</TABLE>

INFLATION
The Company believes that inflation generally has not had a material effect on
the results of its operations. There is no assurance, however, that inflation
will not materially affect the Company in the future.

YEAR 2000
The "Year 2000" problem concerns the inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000. Like many companies, "Year 2000" computer hardware and software failures
of internal systems and/or of third party systems could have a significant,
adverse impact on all aspects of the Company's operations. Because of the range



12 Whitehall Jewellers, Inc.
<PAGE>   15
--------------------------------------------------------------------------------
of possible issues and the large number of variables involved, it is impossible
to quantify the potential cost of problems should the Company's remediation
efforts or the efforts of third parties with whom the Company does business not
be successful. The Company recognizes the need to address this problem in order
to minimize the effects of the "Year 2000" issue on its operations and its
relationships with vendors and other third parties. The Company is using both
internal and external resources to complete its "Year 2000" project.
     The Company operates exclusively in one business segment, specialty retail
jewelry. All stores are located within the United States. The Company's two
principle mission-critical systems applications are the point-of-sale ("POS")
terminals and software which control store transaction processing, and the
centrally maintained information systems infrastructure which controls
financial, merchandising and administrative systems.
     All stores use the same POS software which is licensed from a third-party
vendor. In the fall of 1998, a "Year 2000" compliant version of the POS
software was installed at all stores. Testing of the new software is complete.
The Company has replaced approximately two-thirds of its POS desktop terminals
with "Year 2000" compliant terminals. The remaining portion is expected to be
replaced during the summer of 1999.
     The Company's financial management, information technology, merchandising
and other administrative functions operate centrally from the Company's
corporate office. The Company uses a mid-range computing platform which is
complemented by various networks. The operating systems and hardware platforms
were upgraded, tested and are currently "Year 2000" ready. The replacement or
upgrading of financial management and various customized software packages is
between approximately 50% and 70% complete. These systems upgrades,
replacements, renovations, and testing thereof, are scheduled to be completed
during the summer of 1999. Such completion is currently on schedule. With
respect to systems that the Company is not upgrading, the Company is currently
renovating those systems to be "Year 2000" compliant.
     The Company is developing contingency plans to address unforeseen system or
environmental failures due to the "Year 2000" issue. The major focus of these
plans is to have documented procedures to handle the mission-critical functions
and to define the business tactics to identify and manage certain problems which
may occur as a result of the "Year 2000" issue in as non-disruptive a manner as
possible. The Company does not expect to be able to develop feasible contingency
plans to address all "Year 2000" related failures; and contingency plans which
are developed will only  mitigate the impact of "Year 2000" failures.
     The Company's total costs for making its mission-critical systems "Year
2000" compliant are not expected to be material to the Company's financial
condition. The estimated total cost of the "Year 2000" project is expected to
approximate $1.0 million. To date, the total amount expended on the project is
approximately $500,000.
     The Company believes that the systems upgrades, replacements and
renovations will be made on a timely basis, and that the "Year 2000" issue with
respect to the Company's internal systems will not pose significant operational
problems or result in costs that have a material adverse impact on the Company's
business, financial condition or results of operations. A failure by the Company
to timely address the "Year 2000" issue, or a failure by the Company to maintain
adequate information systems capacity and infrastructure as it upgrades,
replaces and renovates its information 






                                                           1998 Annual Report 13
<PAGE>   16
--------------------------------------------------------------------------------
systems could have a material adverse impact on the Company's business, 
financial condition or results of operations.
     In addition to the Company's internal systems, certain systems of third
party suppliers and service providers which are not currently "Year 2000"
compliant could adversely impact the Company's operations. The Company has
confirmed with its primary lenders and private-label and other credit suppliers
that their systems are, or will on a timely basis be, "Year 2000" compliant. In
addition, certain key vendors and service providers have confirmed orally that
they are implementing plans to address the "Year 2000" issue. The Company will
continue communicating with its key suppliers and key service providers to
monitor their plans to address, and progress in addressing, the "Year 2000"
issue and to evaluate any impact on the Company. However, there can be no
assurance that the systems of third parties with whom the Company does business
will be converted timely. A failure by any such third party to timely address
the "Year 2000" issue could have a material adverse impact on the Company's
business, financial condition or results of operations.

FORWARD-LOOKING STATEMENTS
All statements, trend analysis and other information contained in this report
relative to markets for the Company's products and trends in the Company's
operations or financial results, as well as other statements including words
such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (1) the extent and results of the Company's store expansion
strategy; (2) the seasonality of the Company's business; (3) economic
conditions, the retail sales environment and the Company's ability to execute
its business strategy and the related effects on comparable store sales and
other results; (4) the success of the Company's marketing and promotional
programs; (5) the extent to which the Company is able to retain and attract key
personnel; (6) competition; (7) the availability and cost of consumer credit;
(8) relationships with suppliers; (9) timely "Year 2000" compliance by the
Company and third party suppliers and service providers; (10) the Company's
ability to maintain adequate information systems capacity and infrastructure;
(11) the efficient and successful integration of the Jewel Box locations and
assets into the Company's existing operations; (12) the Company's leverage; (13)
fluctuations in gem and gold prices; (14) regulation; and (15) the risk factors
listed from time to time in the Company's filings with the Securities and
Exchange Commission.


14 Whitehall Jewellers, Inc.
<PAGE>   17
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997

(in thousands, except for per share data)                                          1999             1998              1997
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>               <C> 
Net sales                                                                      $238,942         $188,898          $155,474
Cost of sales (including buying and occupancy expenses)                         139,368          110,873            91,134
----------------------------------------------------------------------------------------------------------------------------
     Gross profit                                                                99,574           78,025            64,340
Selling, general and administrative expenses                                     72,261           55,809            45,309
----------------------------------------------------------------------------------------------------------------------------
     Income from operations                                                      27,313           22,216            19,031
Interest expense                                                                  4,123            3,806             6,993
----------------------------------------------------------------------------------------------------------------------------
     Income before income taxes                                                  23,190           18,410            12,038
Income tax expense                                                                8,928            7,180             4,695
----------------------------------------------------------------------------------------------------------------------------
     Income before extraordinary items                                           14,262           11,230             7,343
Extraordinary item, net                                                              --           (1,035)           10,057
----------------------------------------------------------------------------------------------------------------------------
     Net income                                                                $ 14,262         $ 10,195          $ 17,400
============================================================================================================================
Basic earnings per share:
     Income before extraordinary items                                         $   1.40         $   1.11          $   0.93
     Extraordinary item, net                                                         --            (0.10)             1.28
----------------------------------------------------------------------------------------------------------------------------
     Net income                                                                $   1.40         $   1.01          $   2.21
============================================================================================================================
     Weighted average common share and common share equivalents                  10,183           10,093             7,868
Diluted earnings per share:    
     Income before extraordinary items                                         $   1.38         $   1.10          $   0.89
     Extraordinary item, net                                                         --            (0.10)             1.22
----------------------------------------------------------------------------------------------------------------------------
     Net income                                                                $   1.38         $   1.00          $   2.11
============================================================================================================================
     Weighted average common share and common share equivalents                  10,330           10,225             8,216
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                                           1998 Annual Report 15
<PAGE>   18
-------------------------------------------------------------------------------
BALANCE SHEETS
AS OF JANUARY 31, 1999 AND JANUARY 31, 1998
<TABLE>
<CAPTION>

(in thousands, except for share amounts)                                                 1999           1998
--------------------------------------------------------------------------------------------------------------
ASSETS
<S>                                                                                 <C>            <C>      
Current assets:
   Accounts receivable, net                                                         $   3,147      $   2,532
   Layaway receivables, net                                                             3,514          2,636
   Merchandise inventories                                                            116,748         85,053
   Other current assets                                                                 1,329            996
   Deferred income taxes, net                                                           1,518          1,257
   Deferred financing costs                                                               143            240
--------------------------------------------------------------------------------------------------------------
          Total current assets                                                        126,399         92,714
Property and equipment, net                                                            34,304         22,701
Goodwill, net                                                                           6,448           --   
Deferred income taxes, net                                                                926          1,953
Deferred financing costs                                                                1,529            635
--------------------------------------------------------------------------------------------------------------
          Total assets                                                              $ 169,606      $ 118,003
==============================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Outstanding checks, net                                                          $   7,853      $   9,608
   Revolver loans                                                                      28,886         16,841
   Current portion of long-term debt                                                    2,750          1,000
   Accounts payable                                                                    25,601         16,525
   Income taxes                                                                         5,226          1,419
   Accrued payroll                                                                      4,174          2,906
   Other accrued expenses                                                              13,431          9,448
--------------------------------------------------------------------------------------------------------------
          Total current liabilities                                                    87,921         57,747

Total long-term debt, net of current portion                                           17,890         11,066
Other long-term liabilities                                                             1,627          1,387
--------------------------------------------------------------------------------------------------------------
          Total liabilities                                                           107,438         70,200

Commitments and contingencies
Stockholders' equity:
   Common Stock ($.001 par value; 60,000,000 shares authorized;
    10,185,842 shares, 10,149,019 shares issued and outstanding, respectively)             10             10
   Class B Common Stock ($1.00 par value; 29,567 shares authorized;
    101 shares issued and outstanding)                                                   --             --
   Class C Common Stock ($.001 par value; 39,371 shares authorized;
    no shares issued and outstanding)                                                    --             --
   Class D Common Stock ($.001 par value; 60,000 shares authorized;
    no shares issued and outstanding)                                                    --             --
   Additional paid-in capital                                                          60,008         59,905
   Accumulated earnings (deficit)                                                       2,150        (12,112)
   Treasury stock, 17 shares at cost                                                     --             --
--------------------------------------------------------------------------------------------------------------
          Total stockholders' equity                                                   62,168         47,803
--------------------------------------------------------------------------------------------------------------
          Total liabilities and stockholders' equity                                $ 169,606      $ 118,003
==============================================================================================================
</TABLE>

The accompanying notes are an integral part of the financial statements.



16 Whitehall Jewellers, Inc.
<PAGE>   19
-------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>

(in thousands,                         Common      Class B       Additional     Accumulated    Treasury   Deferred ESOP 
except for share amounts)               Stock    Common Stock Paid-In Capital Earnings/(Deficit) Stock     Compensation 
------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>       <C>               <C>           <C>            <C>            <C>
Balance at January 31, 1996             $--           $ 30          $ 8,766       $(14,673)      $(20,333)    $(21,648)
Net income                               --             --             --           17,400)          --             --
Issued 3,269,500 shares in
 initial public offering                    3           --           40,413           --             --             --
Conversion of stock                         6          (24)              18           --             --             --
Restructuring of ESOP                    --             --          (15,609)        (3,027)        (3,012)      21,648
Cancellation of treasury stock             (1)          (6)              (5)       (23,333)        23,345           --
Issued 1,265,000 shares in
 secondary public offering                  1           --           25,697           --             --             --
Exercise of options                         1           --              524           --             --             --   
Tax effect of the disqualifying
  disposition of stock options           --             --             --            1,326           --             --
------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1997                10           --           59,804        (22,307)          --             --   
Net income                               --             --             --           10,195           --             --   
Exercise of options                      --             --              101           --             --             --   
------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998                10           --           59,905        (12,112)          --             --   
Net income                               --             --             --           14,262           --             --   
Exercise of options                      --             --              103           --             --             --   
------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 31, 1999             $  10         $ --          $60,008       $  2,150           --             --
========================================================================================================================
</TABLE>



The accompanying notes are an integral part of the financial statements.




                                                           1998 Annual Report 17
<PAGE>   20
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>


(in thousands)                                                                 1999            1998            1997 
------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>             <C>             <C>      
Cash flows from operating activities:     
 Net income                                                                 $  14,262       $  10,195       $  17,400
 Adjustments to reconcile net income to net cash
  provided by (used in) operating activities:
     Loss (gain) on extinguishment of debt, net of taxes                         --               218         (10,687)
     Depreciation and amortization                                              5,204           3,964           3,656
     Interest on zero coupon notes                                               --              --               121
     Interest on senior accreting notes                                          --              --            (1,339)
     Interest on subordinated debt                                               --              --               790
     Loss on disposition of assets                                                 84              41             132
     Proceeds from accounts receivables sold, net                               4,041            --              --   
     Changes in assets and liabilities, net of effects of acquisition:
          (Increase) in accounts receivable, net                                 (754)         (1,178)           (185)
          (Increase) in layaway receivables, net                                 (878)           (595)           (465)
          (Increase) in merchandise inventories, net of gold consignment      (28,476)        (20,571)        (24,376)
          (Increase) decrease in other current assets                            (216)           (358)             76
          Decrease in deferred taxes, net                                         688           4,241           1,584
          (Increase) in deferred financing costs                               (1,215)           (100)         (2,503)
          Increase in accounts payable                                          9,076           1,819           5,669
          Increase in accrued liabilities and long-term liabilities             9,193           2,712           3,869
------------------------------------------------------------------------------------------------------------------------
          Net cash provided by (used in) operating activities                  11,009             388          (3,580)
Cash flows from investing activities:
     Capital expenditures                                                     (14,667)        (10,495)         (7,041)
     Payment for acquired jewelry stores                                      (21,760)           --              --   
     Proceeds from assets sold, net                                               467            --                 8
------------------------------------------------------------------------------------------------------------------------
          Net cash used in investing activities                               (35,960)        (10,495)         (7,033)
Cash flows from financing activities:
     Borrowing on old revolver loan                                              --              --            38,078
     Repayment of old revolver loan                                              --              --           (40,197)
     Borrowing on new revolver loan                                           273,930         499,529         224,835
     Repayment of new revolver loan                                          (261,885)       (493,435)       (214,088)
     Repayment of term loan                                                      --              --           (15,000)
     Repayment of old term loan                                               (11,426)           --           (26,600)
     Repayment of senior accreting note                                          --              --           (50,502)
     Repayment of zero coupon note                                               --              --            (2,000)
     Repayment of old subordinated debt                                          --              --           (10,618)
     Repayment of new subordinated debt                                          --            (9,880)         (9,480)
     Proceeds from term loan                                                   20,000          11,426          15,000
     Proceeds from subordinated debt                                             --              --            20,000
     Proceeds from gold consignment                                             5,984            --            15,295
     Proceeds from stock issuance, net                                           --              --            66,114
     Proceeds from exercise of stock options                                      103             101             525
     Increase (decrease) in outstanding checks, net                            (1,755)          2,366            (749)
------------------------------------------------------------------------------------------------------------------------
          Net cash provided by financing activities                            24,951          10,107          10,613
------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents                                          --              --              --   
Cash and cash equivalents at beginning of period                                 --              --              --   
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                  $    --         $    --         $    --
========================================================================================================================
Supplemental disclosures of cash flow information:
     Interest paid during year                                              $   3,913       $   3,481       $   4,304
     Income taxes paid during year                                              4,659             945              82
Non-cash financing activity:
     Tax effect of compensation expense                                     $    --         $    --         $     --
     Tax effect of the disqualifying disposition of stock options                --              --             1,326
</TABLE>

The accompanying notes are an integral part of the financial statements.


18 Whitehall Jewellers, Inc.
<PAGE>   21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS

1. DESCRIPTION OF OPERATIONS

The financial statements of Whitehall Jewellers, Inc. (formerly Marks Bros.
Jewelers, Inc.) (the "Company") include the results of the Company's chain of
specialty retail fine jewelry stores. The Company operates exclusively in one
business segment, specialty retail jewelry. The Company has a national presence
with 250 stores as of January 31, 1999, located in 28 states operating in
regional or super-regional shopping malls.

--------------------------------------------------------------------------------

2. ACQUISITION

On September 10, 1998, the Company acquired substantially all of the assets of
36 jewelry stores operating under the Jewel Box name from Carlyle & Co. Jewelers
and its affiliates, headquartered in Greensboro, North Carolina. The stores are
located in eight states in the Southeastern United States. The Company purchased
all associated inventory, accounts receivable and fixed assets for approximately
$22 million (including fees and other costs) in cash (the "Acquisition"). The
Company financed the Acquisition through a term loan and revolving credit
facility under its new Credit Agreement (see Note 8, Financing Arrangements). In
a related transaction, the Company sold all of the acquired Jewel Box customer
accounts receivable for cash to BancOne, N.A.

     The Acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
date of Acquisition. The excess of the purchase price over the fair value of
the net assets acquired was approximately $6.6 million, and has been recorded as
goodwill which is being amortized on a straight-line basis over 25 years.
Goodwill amortization was $106,000 for the year ended January 31, 1999.

     The net purchase price was allocated as follows:

(in thousands)
------------------------------------------------------------------
Inventory                                               $  9,636
Accounts receivable                                        3,902
Other current assets                                         121
Fixed assets                                               1,861
Other accrued expenses                                      (315)
Goodwill                                                   6,555
------------------------------------------------------------------
Purchase price                                          $ 21,760
------------------------------------------------------------------


--------------------------------------------------------------------------------

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, the Company considers all
temporary cash investments purchased with a maturity of three months or less to
be cash equivalents.

OUTSTANDING CHECKS
Outstanding checks are stated net of store cash balances, of which cash balances
were approximately $1,787,000 and $2,488,000 as of January 31, 1999 and 1998,
respectively.

LAYAWAY RECEIVABLES, NET
Layaway receivables include those sales to customers under the Company's layaway
policies that have not been collected fully as of the end of the year. Layaway
receivables are net of customer payments received to date, and net of an
estimate for those layaway sales which the Company anticipates will never be
consummated. This estimate is based on the Company's historical calculation of
layaway sales that will never be completed. While it is reasonably possible that
the estimate will change, it is the Company's expectation that the financial
impact will not be significant in the near term. The Company charges the
customer to cover the costs of administration for inactive layaways. 


                                                           1998 Annual Report 19
<PAGE>   22
--------------------------------------------------------------------------------

MERCHANDISE INVENTORIES 
Merchandise inventories are stated principally at the lower of average cost or
market. The Company also obtains merchandise from vendors under various
consignment agreements. The consigned inventory and related contingent
obligations are not reflected in the Company's financial statements. At the time
of sale, the Company records the purchase liability and the related cost of
merchandise in cost of sales.

PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation and
amortization. Furniture and fixtures are depreciated on a straight-line basis
over estimated useful lives ranging from five to ten years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
remaining lease terms or ten years. Upon retirement or disposition of property
and equipment, the applicable cost and accumulated depreciation are removed from
the accounts, and any resulting gains or losses are included in the results of
operations.

LONG LIVED ASSETS
When facts and circumstances indicate potential impairment, the Company
evaluates the recoverability of long lived assets carrying values, using
estimates of undiscounted future cash flows over remaining asset lives. When
impairment is indicated, any impairment loss is measured by the excess of
carrying values over fair values.

GOODWILL
Goodwill represents the excess of cost over the fair values of assets acquired
and is amortized over 25 years using the straight-line method.

DEFERRED FINANCING COSTS
In connection with the Company's financing agreements, the Company incurred
various financing costs which have been deferred on the Company's balance sheet
and are amortized over the terms of the agreements.

STORE PREOPENING EXPENSE
Expenses associated with the opening of new store locations are expensed in the
period such costs are incurred.

LEASE EXPENSE
The Company leases office facilities and all retail stores. Certain leases
require increasing annual minimum lease payments over the term of the lease.
Minimum lease expense under these agreements is recognized on a straight-line
basis over the terms of the respective leases. Virtually all leases covering
retail stores provide for additional contingent rentals based on a percentage of
sales. These costs are expensed in the period incurred.

EARNINGS PER SHARE
Earnings per share are calculated by dividing net income by the weighted average
common share equivalents outstanding during the period.

INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect 




 20 Whitehall Jewellers, Inc.
<PAGE>   23
--------------------------------------------------------------------------------

taxable earnings. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.

STOCK BASED COMPENSATION
The Company accounts for stock based compensation under the basis of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
will continue to do so in the future. However, the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation" have been adopted.

COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130") "Reporting Comprehensive Income" for the years ended January 31,
1999, 1998 and 1997. The Company has no components of comprehensive income as
defined by SFAS 130 which are not contained in net income as reported on the
accompanying statements of operations.

MANAGEMENT ESTIMATES
The preparation of financial statements in conjunction with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

RECLASSIFICATIONS
Certain amounts for the years ended January 31, 1998 and 1997 were reclassified
to conform to the current year presentation.

--------------------------------------------------------------------------------

4. ACCOUNTS RECEIVABLE, NET

The Company has charged $1,278,000, $1,182,000, and $1,037,000 for doubtful
accounts for the years ended January 31, 1999, 1998, and 1997, respectively.
<TABLE>
<CAPTION>

(in thousands)                                                             1999             1998 
-------------------------------------------------------------------------------------------------
<S>                                                                       <C>             <C>    
Accounts receivable                                                       4,174           $3,225 
Less: allowance for doubtful accounts                                    (1,027)            (693)
-------------------------------------------------------------------------------------------------
Accounts receivable, net                                                 $3,147           $2,532 
=================================================================================================
</TABLE>

--------------------------------------------------------------------------------

5. INVENTORY

As of January 31, 1999 and January 31, 1998, merchandise inventories consisted
of:
<TABLE>
<CAPTION>

(in thousands)                                                              1999             1998
-------------------------------------------------------------------------------------------------
<S>                                                                     <C>               <C>    
Raw materials                                                           $  4,177          $ 3,504
Finished goods inventory                                                 112,571           81,549
-------------------------------------------------------------------------------------------------
Merchandise inventories                                                 $116,748          $85,053
=================================================================================================
</TABLE>

     Raw materials consist primarily of diamonds, precious gems, semi-precious
gems and gold. Included within finished goods inventory are allowances for
inventory shrink, scrap, and miscellaneous costs of $3,948,000 and $1,700,000
for the years ended January 31, 1999 and 1998, respectively. As of January 31,
1999 and 1998, merchandise consignment inventories held by the Company that are
not included in its balance sheets total $37,778,000 and $32,530,000,
respectively. In addition, gold consignments of $21,279,000 and $15,295,000 are
not included in the Company's balance sheet at

                                                           1998 Annual Report 21
<PAGE>   24
--------------------------------------------------------------------------------

January 31, 1999 and 1998, respectively (see Note 8, Financing Arrangements).
     Certain general and administrative costs are allocated to inventory. As of
January 31, 1999 and 1998, the amounts included in inventory are $1,950,000 and
$1,688,000, respectively. General and administrative expenses allocated
previously to inventory which are included in cost of sales were $2,945,000,
$2,608,000, and $2,237,000 for the years ended January 31, 1999, 1998 and 1997,
respectively.

--------------------------------------------------------------------------------

6. PROPERTY AND EQUIPMENT

Property and equipment includes the following as of January 31:
<TABLE>
<CAPTION>

(in thousands)                                                             1999             1998
--------------------------------------------------------------------------------------------------
<S>                                                                      <C>              <C>    
Furniture and fixtures                                                   $39,188          $31,174
Leasehold improvements                                                    22,398           15,005
--------------------------------------------------------------------------------------------------
Property and equipment                                                    61,586           46,179
Less accumulated depreciation and amortization                            27,282           23,478
--------------------------------------------------------------------------------------------------
Property and equipment, net                                              $34,304          $22,701
==================================================================================================
</TABLE>


Depreciation expense was $4,791,000, $3,657,000, and $3,374,000 for the years
ended January 31, 1999, 1998, and 1997, respectively.

--------------------------------------------------------------------------------

7. LONG-TERM LIABILITIES

Included in long-term liabilities at January 31, 1999 and 1998 are $1,627,000
and $1,387,000, respectively, of deferred lease costs.

--------------------------------------------------------------------------------

8. FINANCING ARRANGEMENTS

In conjunction with the Company's Acquisition (see Note 2, Acquisition), the
Company entered into an Amended and Restated Revolving Credit, Term Loan and
Gold Consignment Agreement (the "Credit Agreement") with its bank group to
provide for a total facility of $110.0 million through September 10, 2003. The
facility provides for a $20.0 million term loan and $90.0 million revolver
facility. Proceeds from the Credit Agreement were used to repay the old credit
facility and to fund the Acquisition.
     Under this Credit Agreement, the banks have a security interest in
substantially all of the assets of the Company including those purchased in the
Acquisition. The Credit Agreement contains certain restrictions on capital
expenditures, investments, payment of dividends, assumption of additional debt,
and mergers, acquisitions and divestitures, among others, and requires the
Company to maintain certain financial ratios based on levels of funded debt,
capital expenditures and earnings before interest, taxes, depreciation and
amortization.

REVOLVER LOAN
The revolving loan facility under the Credit Agreement is available up to a
maximum of $90.0 million, including amounts borrowed under the gold consignment
facility, and is limited by a borrowing base computed based on the value of the
Company's inventory and accounts receivable. Interest rates and commitment fees
on the unused facility float in a grid based on the Company's quarterly
financial performance.
     At January 31, 1999, interest rates for borrowings under this agreement
were, at the Company's option, Eurodollar rates plus 175 basis points or the
banks' prime rate. Interest is payable monthly for prime borrowings and upon
maturity for Eurodollar borrowings. The interest expense under the current and
former revolver facilities for the years ended January 31, 1999, 1998 and 1997
was 



22 Whitehall Jewellers, Inc.
<PAGE>   25
--------------------------------------------------------------------------------

$2,060,000, $1,646,000 and $793,000, respectively, reflecting a weighted
average interest rate of 7.7%, 7.4% and 10.2%, respectively.

TERM LOANS
The term loan facility under the Credit Agreement is available up to a maximum
of $20.0 million. At January 31, 1999, interest rates for these borrowings were,
at the Company's option, Eurodollar rates plus 225 basis points or the banks'
prime rate plus 50 basis points. Interest is payable monthly for prime
borrowings and upon maturity for Eurodollar borrowings. Interest rates and the
commitment fee charged on the unused facility float in a grid based on the
Company's quarterly financial performance. The interest expense under the
current and former term loan facilities for the years ended January 31, 1999,
1998 and 1997 for these borrowings was $1,139,000, $75,000, and $1,330,000,
respectively, reflecting a weighted average interest rate of 7.8%, 7.9%, and
9.2%, respectively.

GOLD CONSIGNMENT FACILITY
During the second quarter of 1996, the Company sold and simultaneously consigned
a total of 39,000 troy ounces of gold for $15.3 million under a gold consignment
facility. During the second quarter of 1998, the Company sold and simultaneously
consigned an additional 20,000 troy ounces of gold for $6.0 million. The
facility provides for the sale of a maximum of 115,000 troy ounces of gold or
$40.0 million. Under the agreement, the Company pays consignment fees of 175
basis points over the rate set by the bank based on the London Interbank Bullion
Rates payable monthly. A commitment fee of 50 basis points per annum on the
unused portion of the gold consignment facility is payable monthly. Interest
rates and the commitment fees charged on the unused facility float in a grid
based on the Company's quarterly financial performance. The consignment fees
totaled $549,000, $447,000 and $445,000 for the years ended January 31, 1999,
1998 and 1997, respectively, at a weighted average rate of 3.5%, 3.4%, and 3.8%,
respectively. On September 10, 2003, the Company is required to repurchase
59,000 troy ounces of gold under this agreement at the prevailing gold rate in
effect on that date, or the facility will be renewed. Based on the gold rate as
of January 31, 1999, the value of the gold consigned was $16.9 million.

SUBORDINATED NOTES
In conjunction with the Company's initial public offering, subsequent follow-on
offering and recapitalization, the Company issued Senior Subordinated Notes
totaling $20,000,000 due in 2004. Series A Senior Subordinated Notes due 2004
(the "Series A Notes") totaling $12,000,000 bear interest at 12.15% per annum
payable in cash, with interest payments due quarterly. The Series B Senior
Subordinated Notes due 2004 (the "Series B Notes") totaling $8,000,000 bear
interest at 15% per annum increasing 1% per annum beginning May 1, 1998, payable
in cash, with interest payments due quarterly.
     The Series A Notes subsequently were exchanged for the Series C Notes which
are identical in all material respects to the Series A Notes, except that the
Series C Notes have been registered under the Securities Act of 1933, as
amended. The Series B Notes subsequently were exchanged for the Series D Notes
which are identical in all material respects to the Series B Notes, except that
the Series D Notes have been registered under the Securities Act of 1933, as
amended.
     In conjunction with the Company's Common Stock offering in November 1996,
the Series D Notes were redeemed at a premium (see Note 9, Extraordinary Items).
In January 1998, $1,480,000 of the Series C Notes were redeemed for a total of
$1,554,000. In January 1998, the Company completed a tender offer to purchase
$9,880,000 of the Series C Notes at a premium of $1,087,000. Interest expense
was $78,000 and $1,185,000 for the years ended January 31, 1999 and 1998,
respectively.



                                                           1998 Annual Report 23
<PAGE>   26
--------------------------------------------------------------------------------

     As of January 31, 1999 and 1998, the current portion and noncurrent portion
of long-term debt consisted of the following:
<TABLE>
<CAPTION>

(in thousands)                                                              1999             1998
--------------------------------------------------------------------------------------------------
<S>                                                                      <C>              <C>    
Current portion of long-term debt:
Term loan                                                                $ 2,750          $ 1,000
--------------------------------------------------------------------------------------------------
Total                                                                    $ 2,750          $ 1,000
==================================================================================================
Long-term debt, net of current portion:
Term loan                                                                $17,250          $10,426
Subordinated debt                                                            640              640
--------------------------------------------------------------------------------------------------
Total                                                                    $17,890          $11,066
==================================================================================================
</TABLE>

     Future scheduled maturities under the loan agreements, excluding the
revolver for January 31, 1999, are as follows:
<TABLE>
<CAPTION>

                                                                         Subordinated
(in thousands)                                               Term            Notes          Total
--------------------------------------------------------------------------------------------------
<S>                                                        <C>              <C>           <C>
January 31, 1999                                           $  500           $ --          $   500
January 31, 2000                                            2,250             --            2,250
January 31, 2001                                            3,250             --            3,250
January 31, 2002                                            4,250             --            4,250
January 31, 2003                                            5,250             --            5,250
January 31, 2004                                            4,500             --            4,500
April 30, 2004                                                 --            640              640
--------------------------------------------------------------------------------------------------
TOTAL                                                     $20,000           $640          $20,640
==================================================================================================
</TABLE>

     The carrying amount of the Company's borrowings under the Credit Agreement
and other long-term borrowings approximate fair value.

DEFERRED FINANCING COSTS
In conjunction with the Company's recapitalization of its financing
arrangements, the Company incurred $2,503,000 in deferred financing costs. In
conjunction with the Company's initial public offering and tender offer to
purchase debt and subsequent repayment of debt, $358,000 and $781,000 of these
costs were included in extraordinary loss on repayment of debt for the years
ended January 31, 1998 and 1997, respectively (see Note 9, Extraordinary Items).
In conjunction with the Company's new Credit Agreement, the Company incurred
$1,100,000 in deferred financing costs which are being amortized over the term
of the agreement. The unamortized portion of deferred financing costs from the
previous financing arrangement is being amortized over the term of the new
Credit Agreement. Amortization expense in the years ended January 31, 1999, 1998
and 1997 was $303,000, $308,000 and $282,000, respectively.

--------------------------------------------------------------------------------

9. EXTRAORDINARY ITEMS

In connection with the Company's initial public offering and recapitalization of
its financing arrangements, the Company utilized a debt discount due to the
early repayment of debt of approximately $18.3 million, less taxes of $7.1
million, resulting in an extraordinary gain on extinguishment of debt.

     The $18.3 million of debt discount consists of the following: 

          i)        $0.6 million on the senior accreting notes

          ii)       $4.0 million on the zero coupon note

          iii)      $13.7 million on the senior subordinated debt


24 Whitehall Jewellers, Inc
<PAGE>   27
--------------------------------------------------------------------------------

     In the fourth quarter of fiscal 1996, the Company recorded an extraordinary
loss of $1.1 million, net of $0.7 million of tax, in connection with the
redemption of the Series D Notes (see Note 8, Financing Arrangements). The loss
consisted of $1.0 million of costs associated with the extinguishment of debt
and $0.8 million in write-off of deferred financing costs. In the fourth quarter
of fiscal 1997, the Company recorded an extraordinary loss of $1.0 million, net
of $0.7 million tax in connection with the tender offer to purchase Series C
notes (see Note 8, Financing Arrangements). The loss consisted of $1.3 million
of costs associated with the extinguishment of debt and $0.4 million write-off
of deferred financing costs.

--------------------------------------------------------------------------------

10. INCOME TAXES

The temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to a significant portion of the
deferred tax asset and deferred tax liability and their approximate tax effects
are as follows, as of January 31:  
<TABLE>
<CAPTION>

                                                        1999                         1998
                                          -----------------------------------------------------------
                                              TEMPORARY       TAX         Temporary         Tax
(in thousands)                               DIFFERENCE      EFFECT       Difference       Effect
--------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>             <C>           <C>    
Merchandise inventories                        $  665       $  263          $  878        $  342 
Property and equipment, net                       994          393           1,185           462 
Accrued rent                                    1,627          642           1,385           540 
Other                                           3,077        1,216           2,346           915 
Net operating loss carryforwards                   --           --           2,164           844 
AMT credit carryforward                            --           --             175           175 
--------------------------------------------------------------------------------------------------
     Total deferred tax asset                   6,363        2,514           8,133         3,278 
--------------------------------------------------------------------------------------------------
Other liability                                   177           70             177            68 
--------------------------------------------------------------------------------------------------
     Total deferred tax liability                (177)         (70)           (177)          (68)
--------------------------------------------------------------------------------------------------
     Net deferred tax asset                    $6,186       $2,444          $7,956        $3,210 
==================================================================================================
</TABLE>

     The net current and non-current components of deferred income taxes 
recognized in the balance sheet at January 31 are as follows:

<TABLE>
<CAPTION>

(in thousands)                                                              1999             1998
--------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>   
Net current assets                                                        $1,518           $1,257
Net non-current assets                                                       926            1,953
--------------------------------------------------------------------------------------------------
                                                                          $2,444           $3,210
==================================================================================================
</TABLE>

     The income tax expense for the years ended January 31, consists of the
following:

<TABLE>
<CAPTION>

(in thousands)                                               1999           1998            1997 
--------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>             <C>    
Current expense                                            $8,162         $2,456          $ 1,381
Deferred tax expense                                          766          4,063            9,744
--------------------------------------------------------------------------------------------------
Total income tax expense                                   $8,928         $6,519          $11,125
==================================================================================================
</TABLE>


                                                           1998 Annual Report 25
<PAGE>   28

--------------------------------------------------------------------------------


     The provision for income taxes on income differs from the statutory tax
expense computed by applying the federal corporate tax rate of 35% for the year
ended January 31, 1999 and 34% for the years ended January 31, 1998 and 1997.
<TABLE>
<CAPTION>

(in thousands)                                              1999            1998            1997 
--------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>            <C>     
Taxes computed at statutory rate                          $8,116          $5,683         $ 9,699 
State tax expense, net of federal benefit                    943             743           1,457 
Other                                                       (131)             93             (31)
--------------------------------------------------------------------------------------------------
Total income tax expense                                  $8,928          $6,519         $11,125 
==================================================================================================
</TABLE>

--------------------------------------------------------------------------------

11. COMMON STOCK

Following are the number of shares issued for each of the Company's classes of
Common Stock as of January 31:
<TABLE>
<CAPTION>

                                                           Class B         Class C           Class D
                                     Common Stock       Common Stock     Common Stock     Common Stock 
                                   (Par value $.001)  (par value $1.00)(par value $.001)(par value $.001)
-----------------------------------------------------------------------------------------------------------
<S>                                    <C>                  <C>             <C>              <C>
Balance at January 31, 1995             3,450,411            29,567          39,370            --
Issuance of Stock Awards                  506,147                --              --            --
-----------------------------------------------------------------------------------------------------------
Balance at January 31, 1996             3,956,558            29,567          39,370            --
-----------------------------------------------------------------------------------------------------------
Exercise of Warrants                      177,887                --              --            --
Conversion of Class C                  
   Shares to Common                     1,394,521                --         (39,370)           --
Conversion of Class B                  
   Shares to Common                       918,270           (25,915)             --            --
Cancellation of Shares                 
   Received from ESOP                     (74,384)               --              --            --
Cancellation of Treasury Shares        (1,396,785)           (3,551)             --            --
Initial Offering                        3,269,500                --              --            --
Secondary Offering                      1,265,000                --              --            --
Exercise of Options                       550,592                --              --            --
-----------------------------------------------------------------------------------------------------------
Balance at January 31, 1997            10,061,159               101              --            --
-----------------------------------------------------------------------------------------------------------
Exercise of Options                        87,877                --              --            --
-----------------------------------------------------------------------------------------------------------
Balance at January 31, 1998            10,149,036               101                            --
-----------------------------------------------------------------------------------------------------------
Exercise of Options                        36,823                --              --            --
-----------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 31, 1999            10,185,859               101              --            --
===========================================================================================================
</TABLE>

     The Company declared a stock split of approximately 35.4 to 1 on April 1,
1996, and the financial statements have been revised to give effect for this
split. Each share of Class B Common Stock and Class D Common Stock are
convertible into Common Stock on a 35.4 for 1 basis. The Class C Common Stock
has been converted on a 35.4 for 1 basis to Common Stock. Each share of Common
Stock is entitled to one vote, and each share of Class B Common Stock is
entitled to the number of votes equal to the number of shares of Common Stock
into which it is convertible.

--------------------------------------------------------------------------------

12. EARNINGS PER COMMON SHARE

The Company adopted SFAS No. 128, "Earnings Per Share," in 1997. This new 
accounting pronouncement eliminates the measure of performance called "primary"
earnings per share and replaces it with "basic" earnings per share. The
essential difference between the two calculations is that the dilutive effects
of stock options outstanding are not considered in the basic computation. As a
result, basic earnings per share tend to be slightly higher than primary
earnings per share. The pronouncement also changed the measure previously
reported as "fully diluted" earnings per share to "diluted" earnings per share.
All prior periods have been restated.

26 Whitehall Jewellers, Inc.
<PAGE>   29
--------------------------------------------------------------------------------

     Basic earnings per share is computed by dividing net earnings available to
holders of common stock by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed assuming the exercising of
all stock options that are profitable to the recipients. Under these
assumptions, the weighted average number of common shares outstanding is
increased accordingly.
     The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computations:
<TABLE>
<CAPTION>

                                         1999                   1998                     1997
------------------------------------------------------------------------------------------------------
                                  BASIC       DILUTED      Basic    Diluted         Basic      Diluted
------------------------------------------------------------------------------------------------------
<S>                             <C>           <C>        <C>        <C>            <C>          <C>   
EPS Numerator:
Income before extraordinary
   item                         $14,262       $14,262    $11,230    $11,230        $7,343       $7,343
EPS Denominator:
Average common shares
   outstanding:                  10,183        10,183     10,093     10,093         7,868        7,868
Effect of dilutive securities:
Stock options                        --           147         --        132            --          348
------------------------------------------------------------------------------------------------------
Total shares                     10,183        10,330     10,093     10,225         7,868        8,216
======================================================================================================
Earnings per share before
   extraordinary item           $  1.40       $  1.38    $  1.11    $  1.10        $ 0.93       $ 0.89
======================================================================================================
</TABLE>

     On February 19, 1999, the Company announced that its Board of Directors had
authorized the repurchase of up to $10.0 million of its Common Stock. Shares
repurchased by the Company will reduce the weighted average number of common
shares outstanding for basic and diluted earnings per share calculations. As of
March 31, 1999, the Company had repurchased 565,500 shares at a total cost of
approximately $9.3 million.

--------------------------------------------------------------------------------

13. EMPLOYEE BENEFIT PLANS

Effective October 1, 1997, the Company established a 401(k) Plan (the "Plan")
for the benefit of substantially all employees. Employees become eligible to
participate in the Plan after one year of service which is defined as at least
one year of employment and 1,000 hours worked in that year. The Company may make
discretionary contributions to the Plan. No such contributions have been made.
     In 1988, the Company established an Employee Stock Ownership Plan (the
"ESOP"), which is a noncontributory plan established to acquire shares of the
Company's Class B Common Stock for the benefit of all employees. In conjunction
with the completion of the Company's initial public offering and
recapitalization of its financing arrangements, the Company restructured its
ESOP. As of January 31, 1998, all remaining shares had been released to
participants. As long as the Company's stock is publicly traded, the Company is
not required to repurchase shares from ESOP participants. The only remaining
activity of the ESOP is to make distributions to existing participants or
beneficiaries.
--------------------------------------------------------------------------------

14. STOCK PLANS

On September 28, 1995, the Company authorized the equivalent of 693,098 options
under the Incentive Stock Option Plan (the "1995 Plan") to be granted to certain
members of the Company's management. Options for the equivalent of 688,228 were
issued at exercise prices ranging from $0.90 to $0.99 per share. These prices
are greater than or equal to the fair market value at the date of grant, as
determined by an independent third party valuation. The options allow the
holders to purchase Common Stock within a period ranging from five years to five
years and eight months, 


                                                           1998 Annual Report 27
<PAGE>   30

--------------------------------------------------------------------------------

at a fixed price. No expense was recorded in connection with these options. On
September 28, 1995, the Company granted the equivalent of 506,148 shares of
Restricted Stock to certain members of the Company's management. During fiscal
1995, the Company recognized $461,000 in compensation expense relating to the
issuance of these shares. This amount represents the fair market value of the
shares at the grant date, as determined by an independent third party valuation.
     In April 1996, the Company approved the 1996 Long-Term Incentive Plan (the
"1996 Plan"). Under the 1996 Plan, the Company may grant incentive stock options
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, or nonqualified stock options. In addition, the Company may grant
stock appreciation rights ("SARs"), bonus stock awards which are vested upon
grant, stock awards which may be subject to a restriction period and specified
performance measures, and performance shares. Performance shares are rights,
contingent upon the attainment of the performance measures within a specified
performance period, to receive one share of Common Stock, which may be
restricted, or the fair market value of such performance share in cash. A total
of 771,189 shares of Common Stock have been reserved for issuance under the 1996
Plan. Grants may be made under the 1996 Plan during the ten years after its
effective date. Options granted under the 1996 Plan generally vest in four equal
annual installments and expire ten years after the date of grant. Options and
shares granted under the plans are subject to forfeiture based on, among other
things, the nature and timing of the termination of employment.
     During the year ended January 31, 1997, the Company canceled and reissued
57,176 options that had been granted earlier in the year. These options were
granted at various dates at current market prices ranging from $14.00 to $27.00,
with a weighted-average exercise price of $19.57. These options were reissued at
terms equal to the originally issued options with reduced exercise prices
ranging from $10.13 to $10.75 and a weighted-average exercise price of $10.53.
The reissued options were issued at exercise prices equal to the current market
price of the Company's stock at the date of reissuance. No options which had
been granted to executive officers were reissued.
     The Company approved the 1997 Long-Term Incentive Plan (the "1997 Plan") on
February 24, 1997 and the stockholders adopted the 1997 Plan on June 5, 1997.
Under the 1997 Plan, the Company may grant ISOs or nonqualified stock options.
The 1997 Plan also provides for the grant of stock appreciation rights, bonus
stock awards which are vested upon grant, stock awards which may be subject to a
restriction period and specified performance measures, and performance shares.
Performance shares are rights, contingent upon the attainment of performance
measures within a specified performance period, to receive one share of Common
Stock, which may be restricted, or the fair market value of such performance
share in cash. A total of 400,000 shares of Common Stock have been reserved for
issuance under the 1997 Plan. Grants may be made under the 1997 Plan during the
ten years after its effective date. Options granted under the 1997 Plan
generally vest in four equal annual installments and expire ten years after the
date of grant.
     In December 1997, the Company adopted the 1998 Non-Employee Director Stock
Option Plan (the "1998 Plan"), effective February 1, 1998. Under the 1998 Plan,
non-employee directors may elect to receive all or a designated amount of their
directors' fee in the form of stock options. A total of 25,000 shares have been
reserved for issuance under the 1998 Plan. Grants may be made during the ten
years after its effective date. Options granted under the 1998 Plan vest at the
end of the quarter in which the date of grant occurs and expire ten years after
the date of grant. As of January 31, 1999, 10,223 options had been granted under
the 1998 Plan.

28 WHITEHALL JEWELLERS, INC.
<PAGE>   31

--------------------------------------------------------------------------------

     Option activity for the years ended January 31, 1997, 1998 and 1999 was as
follows:
<TABLE>
<CAPTION>

                                                                   Weighted-Average     Options
                                                    Shares          Exercise Price     Exercisable
---------------------------------------------------------------------------------------------------
<S>                                              <C>                   <C>              <C>    
Balance at January 31, 1996                        680,470               0.94             680,470
---------------------------------------------------------------------------------------------------
Options granted                                    761,716              14.30
Options exercised                                 (550,602)              0.95
---------------------------------------------------------------------------------------------------
Balance at January 31, 1997                        891,584              11.78             129,868
---------------------------------------------------------------------------------------------------
Options granted                                    189,150              11.55
Options exercised                                  (87,877)              0.94
Options canceled                                   (11,150)              9.68
---------------------------------------------------------------------------------------------------
Balance at January 31, 1998                        981,707             $12.73             232,424
---------------------------------------------------------------------------------------------------
Options granted                                    114,093              17.05
Options exercised                                  (36,823)              3.20
Options canceled                                   (21,575)             14.18
---------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 31, 1999                      1,037,402             $13.52             439,371
===================================================================================================
</TABLE>

     For years ended January 31, 1999, 1998, and 1997, respectively, the
weighted-average fair value of 114,093, 189,150, and 761,716 options at the date
of grant with an exercise price equal to market price was $8.01, $6.27, and
$7.65, respectively.
     The following table summarizes the status of outstanding stock options as
of January 31, 1999:
<TABLE>
<CAPTION>

                  Options Outstanding                             Options Exercisable
---------------------------------------------------------------------------------------------------
                   Number of       Weighted Average       Weighted-     Number of      Weighted-
    Range of        Options           Remaining           Average        Options       Average  
Exercise Prices   Outstanding     Contractual Life    Exercise Price    Exercisable  Exercise Price
---------------------------------------------------------------------------------------------------
<C>      <C>          <C>                <C>                <C>           <C>              <C>   
$ 0.90 - $ 0.90       13,700             6.66               $ 0.90        13,700           $ 0.90
$10.13 - $13.94      239,672             8.12               $11.26        75,443           $11.17
$14.00 - $14.00      684,540             7.26               $14.00       342,272           $14.00
$14.13 - $20.00       99,490             9.31               $17.34         7,956           $17.64
---------------------------------------------------------------------------------------------------
$ 0.90 - $20.00    1,037,402             7.65               $13.51       439,371           $13.16
===================================================================================================
</TABLE>

     Had the Company elected to apply the provisions of SFAS No. 123,
"Accounting for Stock Based Compensation" regarding recognition of compensation
expense to the extent of the calculated fair value of stock options granted
during the years ended January 31, 1999, 1998 and 1997, reported net income and
earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>

(in thousands, except per share amounts)  1999            1998             1997
--------------------------------------------------------------------------------
<S>                                  <C>             <C>             <C>       
Net income, as reported              $   14,262      $   10,195      $   17,400
Pro forma net income                     12,641           8,782          16,495
Earnings per share, as reported            1.38            1.00            2.11
Pro forma earnings per share               1.22            0.86            2.01

</TABLE>

                                                           1998 Annual Report 29
<PAGE>   32
--------------------------------------------------------------------------------

     For purposes of pro forma net income and earnings per share calculation in
accordance with SFAS No. 123, for each option granted under the 1995 Plan during
the year ended January 31, 1996, the fair value is estimated as of the date of
grant using the Minimum Value method using a weighted-average assumption of 6.1%
risk-free interest rate and 5.5 year option life. For each option granted during
the years ended January 31, 1999, 1998 and 1997, the fair value is estimated
using the Black-Scholes option-pricing model. The assumptions used are as
follows:
<TABLE>
<CAPTION>

                                 1999      1998       1997
--------------------------------------------------------------------------------------------------
<S>                              <C>       <C>        <C> 
Risk-free interest rate          5.3%      6.4%       6.7%
Dividend yield                     0        0         0
Option life                    6 YEARS  6 years     6 years
Volatility                        40%       47%       45%
</TABLE>

--------------------------------------------------------------------------------

15. COMMITMENTS

The Company leases office facilities and all retail stores, generally under
noncancelable agreements for periods ranging from 7 to 13 years. Most leases
require the payment of taxes, insurance and maintenance costs. Future minimum
rentals under noncancelable operating leases as of January 31, 1999 are as
follows:
<TABLE>
<CAPTION>

(in thousands)          Years ending January 31,         Amount
--------------------------------------------------------------------------------
<S>                     <C>                            <C>             
                        2000                           $ 16,033        
                        2001                             15,836
                        2002                             15,233
                        2003                             14,303
                        2004                             13,753
                        thereafter                       47,564
                        ---------------------------------------
                                                       $122,722
                        =======================================
</TABLE>

Total rental expense for all operating leases is as follows, for the years ended
January 31:
<TABLE>
<CAPTION>

                                                           1999           1998             1997
-------------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>             <C>
Rental expense:
Minimum                                                  $13,517        $10,748          $ 8,947
Rentals based on sales                                     2,015          1,746            1,523
-------------------------------------------------------------------------------------------------
                                                         $15,532        $12,494          $10,470
=================================================================================================
</TABLE>


30 Whitehall Jewellers, Inc.
<PAGE>   33
--------------------------------------------------------------------------------

16. UNAUDITED QUARTERLY RESULTS

The Company's results of operations fluctuate on a quarterly basis. The
following table sets forth summary unaudited financial information of the
Company for each quarter in fiscal 1998 and fiscal 1997. In the opinion of
management, this quarterly information has been prepared on a basis consistent
with the Company's audited financial statements appearing elsewhere in this
annual report, and reflects adjustments consisting of normal recurring
adjustments necessary for a fair presentation of such unaudited quarterly
results when read in conjunction with the audited financial statements and
notes thereto.
<TABLE>
<CAPTION>
                                                      1998 QUARTERS ENDED
(in thousands,               --------------------------------------------------------------------
except per share amounts)      APRIL 30, 1998   JULY 31, 1998 OCTOBER 31, 1998  JANUARY 31, 1999   
-------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>           <C>               <C>     
Net sales                            $ 41,584      $ 46,849      $ 48,483          $102,026
Gross profit                           16,139        18,762        19,030            45,643
Income from operations                  1,946         3,574         2,193            19,600
Net income                                702         1,681           609            11,270
Diluted earnings per share:                                                       
     Net income                      $    0.0      $   0.16      $   0.06          $   1.10
=================================================================================================
</TABLE>                                                                      

<TABLE>
<CAPTION>
                                                      1997 Quarters Ended
(in thousands,               --------------------------------------------------------------------
except per share amounts)      April 30, 1997   July 31, 1997 October 31, 1997  January 31, 1998   
-------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>           <C>               <C>     
Net sales                            $ 34,714      $ 40,515      $ 39,477          $ 74,192
Gross profit                           13,651        16,297        15,514            32,563
Income from operations                  1,809         3,868         2,501             4,035
Income before extraordinary 
item                                      540         1,760           909             8,021
Net income                                540         1,760           909             6,986(1)
Diluted earnings per share:                                                        
     Income before extraordinary 
     item                            $   0.05      $   0.17      $   0.09          $   0.78
=================================================================================================

</TABLE>

(1) Reflects extraordinary loss on extinguishment of debt in the fourth quarter 
of fiscal 1997 (See Note 9, Extraordinary Items).


                                                           1998 Annual Report 31
<PAGE>   34

--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

PRICEWATERHOUSECOOPERS [LOGO]

To the Board of Directors and Shareholders of
Whitehall Jewellers, Inc.

In our opinion, the accompanying balance sheets and the related statements of
operations, shareholders' equity, and cash flow, present fairly, in all material
respects, the financial position of Whitehall Jewellers, Inc. (formerly Marks
Bros. Jewelers, Inc.) (the "Company") at January 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended January 31, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois
March 3, 1999


MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's stock began trading on the NASDAQ National Market System under the
symbol MBJI on May 2, 1996. On January 20, 1999, the Company changed its
corporate name to Whitehall Jewellers, Inc., and began trading under the symbol
"WHJI." At April 16, 1999, there were 105 holders of Class B stock and 165
holders of Common Stock for a total of 270 registered shareholders.
<TABLE>
<CAPTION>

                               1999                       1998
                        --------------------------------------------------
                        HIGH           LOW         High          Low
--------------------------------------------------------------------------
<S>                     <C>          <C>          <C>          <C>        
First Quarter           $20.50       $17.125      $12.25       $ 9.00
Second Quarter           19.875       15.25        13.875       10.500
Third Quarter            18.50         9.50        18.125       10.875
Fourth Quarter           18.625       10.625       17.75        14.00
</TABLE>

     The Company has not declared any dividends in fiscal 1998 and 1997, and
intends to retain its earnings to finance future growth. Therefore, the Company
does not anticipate paying any cash dividends in the foreseeable future. The
declaration and payment of dividends, if any, is subject to the discretion of
the Board of Directors of the Company and to certain limitations under the
General Corporation Law of the State of Delaware. In addition, the Company's
Credit Agreement contains restrictions of the Company's ability to pay
dividends. The timing, amount and form of dividends, if any, will depend, among
other things, on the Company's results of operations, financial condition, cash
requirements and other factors deemed relevant by the Board of Directors.


32 Whitehall Jewellers, Inc.

<PAGE>   35


---------------------
CORPORATE INFORMATION
---------------------

BOARD OF DIRECTORS

Left to right:

MATTHEW M. PATINKIN
Executive Vice President-
Store Operations

JACK A. SMITH(2)

DANIEL H. LEVY(1,2)                        [PHOTO]

HUGH M. PATINKIN
Chairman of the Board, 
Chief Executive Officer, 
President

NORMAN PATINKIN (1,2)
United Marketing Group, L.L.C.

JOHN R. DESJARDINS
Executive Vice President - 
Finance and Administration,  
Secretary

RICHARD BERKOWITZ(1)                         (1) Audit Committee
                                             (2) Compensation Committee
--------------------------------------------------------------------------------
<TABLE>
<S>                                 <C>                               <C>    
CORPORATE OFFICERS                  INDEPENDENT AUDITORS              SHAREHOLDER INQUIRIES        
                                    PricewaterhouseCoopers, LLP       John R. Desjardins           
HUGH M. PATINKIN                    200 East Randolph Street          Executive Vice President -   
Chairman of the Board,              Chicago, IL 60601                 Finance and Administration   
Chief Executive Officer,                                              312-782-6800, extension 151  
President                           TRANSFER AGENT                                                 
                                    Boston EquiServ                   COMMON STOCK LISTING         
JOHN R. DESJARDINS                  150 Royall Street                 Shares of Common Stock of    
Executive Vice President -          Canton, MA 02021                  Whitehall Jewellers, Inc.    
Finance and Administration,                                           are listed and traded        
Secretary                           CORPORATE HEADQUARTERS            on the NASDAQ National       
                                    155 North Wacker Drive            Market System (WHJI).        
MATTHEW M. PATINKIN                 Chicago, IL 60606                                              
Executive Vice President -                                            
Store Operations                    ANNUAL MEETING                
                                    The Annual Meeting of         
LYNN EISENHEIM                      Shareholders will be held     
Executive Vice President -          June 8, 1999 at 10:00 a.m.    
Merchandising                                                     
                                    GENERAL COUNSEL               
MANNY A. BROWN                      Sidley & Austin               
Executive Vice President -          One First National Plaza      
Store Operations                    Chicago, IL 60603             
                                                                  
</TABLE>


<PAGE>   36
                                   WHITEHALL
                            WHITEHALL JEWELERS, INC.


                             155 NORTH WACKER DRIVE
                               CHICAGO, IL 60606
                                  312-782-6800